There are multiple compensation models for practicing physicians which tend to be tied to the practice type. In addition to a straight salary model like most general salaried workers earn, medical systems and hospitals commonly offer physician income guarantees. As the name describes, this model ensures a physician earns a specific amount of income regardless of production and other outside factors. This offering provides predictability and peace of mind as physicians start their new career.
There are two main types of physician income guarantees: a hospital physician income guarantee where a hospital guarantees a certain compensation is attained each year by the physician, and another where a system assists a physician to establish a practice to the point it eventually becomes self-sustaining and the physician becomes an owner or partner.
How a Physician Income Guarantee Works: Hospital Income Guarantee
In the first instance, a physician may work for a hospital offering a salary with RVU production bonuses for exceeding a patient volume goal. RVUs, or relative value units, are based on a combination of:
- wRUVs (work relative value units) which measures the complexity of exams/procedures
- the expenses incurred
- malpractice insurance cost
RVU compensation models are the most frequently used for physician compensation. Each wRVU is tied to a CPT (current procedural terminology) code, a universal metric for coding medical services, which is added to expenses and malpractice cost which equals the total RVU. That total is then multiplied by the Centers for Medicare and Medicaid Services conversion factor to generate a total amount owed to the physician for the work performed.
The greater amount of wRVUs, the higher the compensation. For example, a primary care physician who administers a few exams will likely receive less wRVUs than a neurosurgeon performing one surgery, as the skills and time required to complete the surgery are more demanding than a few standard exams.
In this model, hospitals set a guaranteed amount of pay where physicians receive additional compensation equal to the amount of guaranteed income minus the actual income generated by the physician. This model protects physicians against factors impacting their volume productivity including developing their practice, variability in patient volume, or certain unforeseen events impacting hospital patient volume.
It is critical that physicians know what restrictions, forgiveness periods, or durations impact their salary. Consulting a medical contract attorney allows for a physician to fully understand these terms and what they can expect during their employment.
How a Physician Income Guarantee Works: Income Guarantee Resulting in Partnership or Ownership
For the latter model, a medical group will temporarily cover startup and overhead costs that may be otherwise prohibitive for a physician starting their new position until they are able to self-sustain from the volume they have built.
Depending on the hospital system or practice, the guarantee period (financial assistance) may generally be offered from one to three years. The forgiveness period, the duration where the physician agrees to remain in the community for a number of years beyond the guarantee period in which the money provided in support by the hospital is forgiven or repaid, usually spans two to three years for each year of support. If you accept an income guarantee and leave the community prior to the end of the forgiveness period, you could be required to repay the unforgiven portion.
A physician will receive a monthly payment from the hospital that equals the difference between the monthly guaranteed amount and the actual income collected by the physician in each month. As the physician increases the revenue they receive, the payments from the hospital will decrease. When the physician’s revenue is equal to or greater than the guaranteed amount, the monthly payment from the hospital will equal zero. At that point, you’re able to sustain your own practice and therefore the purpose of the guarantee is fulfilled.
The hospital will guarantee both your salary and your share of incremental overhead expenses. If solo, they will cover most of your costs to start and run the business. If you’re joining an existing practice, the hospital covers the incremental expenses incurred by the practice, but not the existing expenses. For example, if the practice adds a nurse, his or her salary, benefits, retirement, and so on, is new to the practice and is therefore covered. The rent is typically not an incremental expense since the hospital or medical group was paying it already before you arrived, unless there is a build-out or expansion to the practice to bring you aboard.
Let’s say you are moving to a community and agreed to an annual salary of $240,000 per year or $20,000 per month. You have an overhead of 50% including malpractice insurance, employees, EMR, rent, etc. At 50% overhead, for every dollar that comes in the door, 50 cents goes to operating the practice, and the other 50 cents is your income. In this case, you will need $240,000 to pay yourself, and $240,000 to run the business. The total income guarantee amount is $480,000, or $40,000 per month. If overhead is higher, this number goes up; if lower, it goes down.
In this instance, the hospital is theoretically responsible for $40,000 per month. If it’s a 1-year guarantee with 2 years forgiveness, they are only responsible for the first year of the agreement and you have to support yourself and your business thereafter, which means your salary may go down after the guarantee period if you are not marketing and generating business.
How a Physician Income Guarantee Works: Income Guarantee Resulting in Partnership or Ownership Example
Below is a simple income guarantee example where the physician has a base salary of $240,000, 50% overhead, and the guarantee owed to the hospital at the end of one year equals $143,000.
In that first month, you open the doors, see patients, and things look promising; however, the insurance carriers do not quickly turn your claims (typically 30-90 days turnaround) and unfortunately, you collect $0 the first month. At the end of the month, you submit your monthly financials to the hospital and they cut you a check for 40,000.
In the second month, you collect $5,000 based on the claims you submitted the first month. After you submit your financials, the hospital will cut a check to you for $40,000 guaranteed less $5,000 collected for a total of $35,000. An example model for a full year is listed below:
|Month||Guarantee Amount||Collections||Monthly Payment (From the hospital)|
Pay attention to the terms in your contract: is this amount forgiven annually at the anniversary of the beginning of the forgiveness period or per month? If there is a 3-year forgiveness period with a 1-year guarantee, $47,667 will be forgiven each year. If you leave after 22 months into the forgiveness period with annual forgiveness, you have had $47,667 forgiven and owe the hospital roughly $92,000. If it is forgiven monthly, you would owe $55,611.
If you’re strongly considering joining a large health system or hospital, obtaining a physician income guarantee can be a reliable and steady way to build your patient base and your career. As physician recruiters, we have reviewed many different types of compensation models and are happy to discuss which option would be best for you and your career and lifestyle goals.
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